This chapter is from the book

Cycles

The stock market, and most other markets, has distinct cycles. Prices oscillate up and down around a trend. Sometimes these oscillations show regularity in their occurrence beyond pure chance. We call them “cycles,” but they are not cycles in the harmonic sense. They are constant intervals between successive price tops or bottoms. They are also controversial. Some think cycles are imaginary, visions in the eyes of technical analysts; others discount them because their behavior is unexplained. Whereas cycles such as the 68-day are obviously difficult to justify, others are obvious and as regular as the sunrise each day.

The most obvious and easily explained are the seasonal cycles in agricultural commodities. The most predominant cycle in the stock market is the four-year cycle. This stock market cycle makes an important low roughly every four years. Wesley Mitchell (1874–1948), economics professor and founder of the National Bureau of Economic Research (NBER), discovered it. He observed that the U.S. economy from 1796 to 1923 suffered a recession approximately every four years. The stock market over the past 200 years has shown the same periodicity. Table 3.1 shows the cycle lows over the past 100 years and the average interval between lows.

There are other cycles in the stock market, but the most important, and the one we are concerned with here, is the four-year cycle. It is often associated with the business cycle, and because it bottoms every four years, it is also called the “Presidential” cycle for the interval between Presidential elections. I believe it has nothing to do with the Presidential election because it also occurs in most other countries and especially in those whose elections occur at intervals other than four years. It has also occurred for well over 150 years and began long before the U.S. became an economic superpower. It is likely due to a combination of business cycle and investor memory, but both thoughts are unproven. Nevertheless, it exists and is a very important factor when analyzing the probability of imminent market declines.

Of course, the business cycle is not a cycle in the harmonic sense either. Instead, it is a wide fluctuation in business activity with an irregular periodicity that averages four to five years. However, it does affect stock market prices and bond interest rates.